Morgan Stanley’s Wilson and JPMorgan’s Michele Warn About QT

Morgan Stanley’s Wilson and JPMorgan’s Michele Warn About QT

(Bloomberg) — Echoing just about everyone on Wall Street, Bob Michele of JPMorgan Asset Management and Michael Wilson of Morgan Stanley are wary of the potential effects of the Federal Reserve’s so-called quantitative tightening.

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This is revealed in the bond market. Credit spreads, typically the difference between a corporate bond’s yield and the benchmark rate, are still “very expensive,” Michele, chief investment officer at JPMorgan Asset Management, told Bloomberg Television on Wednesday.

“They don’t seem to adequately assess recession risks. By the end of the year they will certainly be back to the old highs of around 600,” Michele said. “I also don’t think the markets are properly pricing quantitative tightening. That comes in full force next month.”

In September, the Fed is scheduled to increase its balance sheet reduction to a maximum pace of $95 billion – depleting up to $60 billion in Treasury bonds and $35 billion in mortgage bonds. Since June, the monthly ceiling has been US$ 47.5 billion. But last month, the Fed only reduced its portfolio by just about $22 billion. This need to tighten policy to contain rising inflation has been a major headache for the Fed.

Read more: Fed QT will not plan: new daily economy

Wilson, chief investment officer at Morgan Stanley, in a recent note noted that while the Fed stopped tightening policy before the start of an economic contraction over the past four cycles, triggering a bullish signal for equities, current historic levels of inflation mean the Fed will likely still be tightening when a recession hits.

US equities remain stuck in a trading range with the S&P 500 benchmark oscillating between gains and losses on Wednesday. The benchmark failed to cross the closely watched 200-day moving average, a technical boundary that many see as a sign of a durable uptrend.

“The 200-day moving average is relevant because it’s the trend,” Wilson said in the same interview. “So we are in a downtrend, and until the market can get back above that downtrend, I think making a grandiose call on new highs is, frankly, irresponsible considering what is happening with the Fed and QT coming up. . It will be much worse than what people have experienced so far.”

But some Wall Street analysts have begun to entertain the idea that the Fed will stop tightening, even as fears of a recession mount. Not Wilson.

Read more: Morgan Stanley sees higher Fed hikes as JPMorgan awaits pivot

“The big change this time around from, say, previous periods, when maybe the markets were excited about a pivot from the Fed, is that this time they won’t unless something really bad happens, which obviously won’t be good for them. the actions,” Wilson said. . “I think 15 years of excessive monetary policy have made the average investor a little too complacent about this reality.”

Still, Wilson offered two scenarios in which the central bank could turn, although he stressed that it is unlikely. Either the US sees a “collapse in inflation” because there is deflation in many pockets of the economy or the jobs data show the country is in a “full recession where companies are actually cutting employment”.

“I don’t know where the pain point is in that for the Fed. But they don’t want to take us into a deep recession,” said Wilson, who correctly predicted this year’s sell-off. “But if we get negative payroll data over the next two months — and that’s possible because the household data is already negative — that would be something they would take a break from. I don’t think they would start cutting rates, but they might take a break. The problem with this narrative for equity investors is that it won’t be good for profits. It’s not going to be good for stock prices.”

JPMorgan’s Michele said the central bank should clarify more clearly how aggressive it intends to be in the face of growing recession concerns at the Fed’s much-anticipated annual event in Jackson Hole, Wyoming.

“What I hope, at the very least, is that it gives us some metrics on what would make them stop rate hikes and what would make them actually start cutting rates,” Michele said, referring to the Fed Chairman Jerome Powell. . “What I think the Fed should be doing and Powell in particular is taking the lead at the central bank and making it their moment. For God’s sake, we are facing the highest inflation in 40 years.”

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